Wall Street Pay Cuts: The Sacrificial Seven

The Obama administration is finally getting tough — on corporate invalids.

The government's "pay czar," Kenneth Feinberg, is coming down hard on the seven firms under his jurisdiction, ordering steep pay cuts for about 175 top executives. The brass at AIG (AIG), Citigroup (C), Bank of America (BAC), GMAC, General Motors, Chrysler, and Chrysler Financial will have to live without the nine-digit paychecks Wall Street's titans have become accustomed to. Some won't even make eight figures. And the majority of their pay will come in the form of stock that can be cashed in only after the companies have met long-term performance targets. Until that happens, the impoverished execs might have to get by on meager salaries that might not even reach $1 million.

So hyperventilate about the government meddling in the private sector, and then consider that every one of these firms would have been vaporized if not for government intervention. American taxpayers effectively own AIG and General Motors, with major stakes in the other firms. Together, all seven firms have devoured nearly $300 billion worth of bailout funds. They've gobbled up the majority of the TARP money in the government's corporate rehab program. None of these firms have said when they will pay back those bailout funds, and some may never pay it back.

That makes the employees of these ailing firms the equivalent of government workers. By that measure, they're some of the most highly paid people on the federal payroll. Traders at AIG, who in the past have earned millions for financial bets that ultimately trashed the firm, will earn no more than $200,000, according to the Wall Street Journal. That's practically the minimum wage by Wall Street standards, but it's more than Treasury Secretary Tim Geithner and his fellow cabinet secretaries earn. It probably irks the traders that they'll still earn less than the president, whose annual pay is $400,000.

Government limits on executive pay are controversial, for good reason. But there are really two separate issues. The first is how much executives should earn at companies dependent on government aid. By the free-enterprise standards that Wall Street capitalists live and breathe, firms like Citigroup, AIG, and GM should already have failed and disappeared, to be replaced by other firms able to manage their business better. The unfortunate thing about Feinberg's restrictions is that for the most part, they punish new management that came in to clean up problems created by others. Former CEOs like Chuck Prince of Citigroup and Martin Sullivan of AIG, who bear much of the responsibility for their firms' collapse, remain off the hook. But lots of small businesses and other firms have failed with no bailouts for anybody, and if there's anything unfair about the conditions attached to bailouts, it's that a bunch of people at a handful of big firms still have jobs and paychecks while other workers just as worthy didn't qualify for a bailout because their firms weren't big or important enough.

Citi, AIG, and the rest complain that with strict limits on pay, they won't be able to retain or attract the talented workers needed to keep their businesses competitive. This is laughably dubious. The "talent" at these firms led them to the brink of extinction in the first place. By definition, as bailout recipients, these are uncompetitive firms. There's a presumption that the government's intent is to make these firms competitive again, but don't be so sure. In a more stable environment than we've had over the past year, the economy could have withstood the demise of these weak firms — and might even have been better off. The feds are still looking for ways to rein in huge, unwieldy firms with disproportionate market power, and starving them of lavish pay packages might be one way to accomplish that. And by the way, lots of talented bankers from the defunct Lehman Brothers and Bear Stearns, along with other downsized firms, are looking for work.

The second issue is the pay earned at all the other companies in America, the ones that haven't needed long-term bailouts to survive. There are legitimate questions about Goldman Sachs (GS) and a few other Wall Street survivors that paid back their TARP funds but also got back-door bailouts through redemptions of contracts with AIG, sweetheart government loans, and other measures. As unseemly as those stealth bailouts are, they may end up being the ransom paid in exchange for a more stable financial system. But the Goldman clique is a tiny fraction of all firms, and it's not even clear how the government would enact pay restrictions on companies that aren't dependent on federal funds.

So while Obama hammers the Sacrificial Seven, the rest of corporate America is probably off the hook. Severe pay limits at the biggest bailout recipients help Obama address the legitimate rage that accompanied the news earlier this year of lavish bonuses at AIG and Merrill Lynch (now part of Bank of America). As for the other firms and what they pay their people, that's now a matter for Congress to decide, as it debates new regulations on the financial industry. The strongest pay proposal so far would merely require a nonbinding shareholder vote on pay packages for executives. But shareholders have always had the ability to object to lavish pay, even when CEOs were raking in packages in excess of $100 million whether their firms prospered or not. Maybe shareholders will be more vigorous this time around. Let's hope somebody is.

Disclosure: No positions.

Comments

[Moon Kil Woong:]

By and large Goldman and the others that paid back TARP still too advantage and are still taking advantage of favorable government policies, accounting policies, and free money. The argument they shouldn't be allowed to pay back TARP at the time was that it let them off the hook to being fiscally responsible to the American public to whom they owe their existence upon.

If the the Obama administration was quicker to act then perhaps Goldman would not be off the hook. But then again, knowing how the Washington insider game works no doubt they would have paid back TARP that much sooner even if they had to borrow to do so. At every turn Goldman magically gets the get everything free and don't pay a dime card. It seems that people are finally starting to notice. That's only because their voracious greed and belligerence is growing by leaps and bounds. They seem well, above the law. And no wonder, looking around at the actions done over the last 2 years I fail to see any law in the financial market these days whatsoever.

Oct 23 06:31 AM

[a fat panda:]

Industries with excess capacity implode in the same way. I worked in tech in 2000. Here is what will happen once the government quits subsidizing the industry.

You have had more consolidation and job loses. Those job loses will put experience on the street and available at much lower prices. Companies that fail to take advantage of those resources will be the tall price company is an ever lowering game of price limbo. Those companies will fail or be consolidated. Start-ups will find niches and put pressure on the old guard where ever there is a reasonable profit to be had.

This isn't happening because of the government has insulated the industry from reality. I have worked at Citi, and know people who work there. They are oblivious to the fact that they are on welfare. Once it is cut-off, watch out. Here is what happened to my wages : in 2001 it was down 35%. In 2002, I got another 20% dumber. By the time it was over my wages were down 70%.

Tech wasn't a commodity and banking is. There were pockets that survived and did well in tech. Once gravity takes hold the 7 are going to be everyone, well those that keep their jobs.

Oct 23 07:08 AM

[MarketGuy:]

Moon,
When a large majority of the "decision makers" on the Govt side have either GS on their career resume', election donations statement, or their tax return, you begin to understand the underlying root cause. (see: Rubin, Paulson, Kashkari, Jester, etc).

Heck, Paulson himself landed atop Treasury because of a Goldman tie. Joshua Bolton, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.

Read this:

www.nytimes.com/2008/1...

I agree people are starting to notice, lets hope this is reflected during elections.

Oct 23 07:26 AM

[a fat panda:]

"By the free-enterprise standards that Wall Street capitalists live and breathe, firms like Citigroup, AIG, and GM should already have failed and disappeared, to be replaced by other firms able to manage their business better. "

Actually Rick, to some extent these companies will just disappear. We needed lending capacity in 2006 when people were refinancing their loans every two years. We still have excess lending capacity, just take out a mortgage refi application and see how many people call you to beat the price you just got.

The problem in banking will not be as sever as it was in tech. But it will all come down to ROI. If the leaders of these businesses, can come-up with returns that justify a 9 digit salary they will get it. If they can't, someone will come in and steal their customers.

Oct 23 07:30 AM

[Buckoux:]

Too bad this executive pay policy does not include Fannie Mae and Freddie Mac. They were just as complicit in financial misconduct as those at AIG and BAC.

Oct 23 11:07 AM

[beaux:]

Buckoux is, of course, correct. The list doesn't stop there, however. What about the regulators who didn't regulate? Or the politicians who implemented their social agenda without regard to simple economics? No mea culpas from this crowd. What can we expect going forward? Aggressive blame-laying in an attempt to divert attention from their own material contribution.

The "bailed out" ex-Bear Stearns and Lehman workers paid dearly as their own personal net worths were wiped. Fine. But Franklin Raines retains his $100+mm for driving a quasi-governmental organization into insolvency (on your dime). Barney Frank's influence has increased. Nancy Pelosi seeks improved fixed-wing transportation and drives to take over 16% of the nation's GDP.

And the President, after riding a global media love-fest into the white house, reveals his thin-skinned self by attacking Fox news for having the temerity to see things differently. Perhaps he didn't read any of Maureen Dowd's mean-spirited, weekly ad hominem attacks on our last president. Sometimes fair but never balanced.

You wanted change, you got change. Sort of.

Oct 25 07:12 PM